Houlberg v. Commissioner

Jens Houlberg and his wife, Jane Houlberg (plaintiffs), timely filed tax returns for the years 1976 through 1979, inclusive. During those years, the Internal Revenue Service (IRS) (defendant) investigated a partnership in which the Houlbergs were involved. In 1979, the IRS sent the Houlbergs a Form 872, seeking consent to extend the limitations period for the IRS to assess the Houlbergs’ tax liability for 1976. The form provided that the Houlbergs’ consent would not “deprive [them] of any appeal rights to which they would otherwise be entitled.” The IRS continued to send the Houlbergs Forms 872 and 872-A—which served a similar function—to extend the limitations period for assessments for the years 1976 through 1978, inclusive. The Houlbergs, after consulting with their accountant, Michael Ravin, initially signed each form. Ravin believed—and induced the Houlbergs to believe—that the Houlbergs’ consent entitled them to hearings with the IRS to appeal any assessments of deficiencies before formal issuance of notices of deficiency. Such prenotice hearings were common; in fact, an IRS unit chief testified that he could not recall any time in which a taxpayer signed a consent and was not granted a prenotice hearing. However, such prenotice hearings were not statutorily guaranteed, and the IRS did not explicitly promise the Houlbergs that it would grant them any hearings. In 1981, the IRS sent the Houlbergs another Form 872-A, this time for the 1978 tax year, which the Houlbergs refused to sign. In 1982, without any prenotice conference, the IRS issued formal notices of deficiency to the Houlbergs for the tax years 1976 through 1979, inclusive. The Houlbergs filed a petition with the United States Tax Court arguing that, because they had not received prenotice hearings, a condition of their consent to the statutory extensions embodied in the signed Forms 872 and 872-A was not met. Accordingly, the Houlbergs argued, the IRS was barred by the statute of limitations to assess deficiencies for the 1976 and 1977 tax years.